Complex financial liability

This article is not intended to be a comprehensive descriptive study of the possibilities of funding the liabilities for a company’s non-financial balance sheet. Instead it is intended to do 2 basic things:

Provide a reminder of the possibilities to find funding to make the project feasible.

Provide a reminder of some parameters for applying caution when accepting credit, both for the company and for the implementation of the different stages that must be followed (growth, maturity, etc).

I will move from the weakest position to the strongest in terms of the creditor’s money:

Equity: direct contributions from partners.

Friends, family & fools: bringing in capital from people to the company in the form of equity. They are profiled as partners in the company.

Business Angels: seekers of exciting projects close to their own character or professional knowledge. The amounts contributed are not very large as they diversify risk among different initiatives. They can be found through associations.

Public subsidies: provision of (non-repayable) public funds for carrying out a project. Scope: national and international, usually over several years. They can be found through many public bodies in the place where the company is based.

Seed capital: this capital is not strictly foundational for the early stages of business growth (larger geographical markets developing new activities, etc.). It can be found through specialist funds and may be public and/or private.

Loans from Business Angels or partners: this would be the same as the first few points but as a capital loan (repayable debt) rather than equity. Members distribute/dilute the risk by separating the contribution of capital and debt.

Equity loans (public and private): this is a not very well known but could end up providing more financial resources to the company. These loans usually have favorable conditions: non regular debt repayment installments, you pay if your cash flow turns a positive value. They have a fixed part and a variable one that applies in certain operational conditions, etc. You can negotiate the amount of contributed money that will function as a loan and what amount as equity. As in some previous points, you must assess the company’s future to know the value of shares/stocks, what percentage is left and how each part of the decision-making structure acts.

Subsidized bank financing: “soft” loans at subsidized interest rates to make the process easier for the company. They are usually sold through traditional commercial banks. A portion of the interest is paid by the company and the corresponding differential via the State’s public bank.

Bank finance: obvious item, but as seen, not the only one. It has to meet a deadline (short and long) involving the quality/maturity of the asset. Working with a pool bank, involving more than one institution, is always recommended.

For most of these products, guarantees are required and when exhausted there are reciprocal guarantee companies (MGCs) operating mutually and expanding the possibility of receiving loans because guarantees have been expanded by funds provided by all partners.

Not all products will be used at the same time. They must be introduced into the company’s liabilities depending on its growth needs (assets such as machinery, buildings, hardware, etc.; sales forces, further sales campaigns, etc.). Attention must be paid to every stage of the company’s growth through its detailed cash flow (balance sheets, working capital, etc.).

As an additional medium / long-term check on financial health, a watch must always be kept on ROA (Return On Assets), ROE (Return On Equity) and the weighted average cost of liabilities. These would show whether or not the effect of financial leverage looks positive, whether it is a good idea to borrow or to wait a little before growing and in order to clean up the balance sheet.

One final comment: attention should be paid to the compatibility of the dividend policy with the debt level so that the company does not lose capital. Recommendation: depending on the country, sector and location, specific economic background, etc., 50% own funds / 50% debt is the maximum acceptable ratio.